Fitch Rates Palm Beach County School Board, FL COPs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a rating of 'AA-' to the following certificates of participation (COPs) to be issued by Palm Beach County School Board, FL (the district):

--$62.6 million COPs series 2015C.

The series C COPs are expected to be sold through negotiation the week of Sept 21. The amount sold may be adjusted depending on market conditions. The fixed-rate COPs will be used for a refunding for debt service savings.

In addition, Fitch also affirms the following ratings:

--Implied GO rating at 'AA';

--$1.5 billion COPs at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The COPs are secured by lease payments subject to annual appropriation by the Palm Beach County School Board under a master lease-purchase agreement. Upon certain events of default or the school board's failure to appropriate funds, leases for all facilities under the master lease will terminate and the district is required to immediately surrender possession of all facilities subject to the master lease. Currently, approximately 38% of gross square feet of district educational space is subject to the master lease.

KEY RATING DRIVERS

SOUND MANAGEMENT: The key credit strength supporting the 'AA' implied general obligation (GO) rating is the district's long track record of strong financial management including conservative budgeting and maintenance of adequate reserves.

AFFORDABLE DEBT LEVELS: Fitch considers key debt ratios to be low. Capital demands are manageable with no additional borrowing needs anticipated.

ECONOMIC RECOVERY ACCELERATING: Tax base growth and employment expansion are rebounding. The county has above-average wealth indicators, strong population growth projections, and a diversifying economy fueled by recent investments in the biotechnology sector.

STRONG APPROPRIATION INCENTIVE: The district has a strong incentive to appropriate lease payments given the large share of educational facilities captured under the master lease program and its reliance on certificate indebtedness to finance capital needs.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL RESERVES: The rating is sensitive to continued structural balance of general fund operations. Weakening of reserves could apply negative pressure on the rating.

CREDIT PROFILE

This district is located in south Florida on the Atlantic coast and serves the entire county, which had a 2014 population of 1.4 million. The district is the fifth largest in the state and the 11th largest in the nation, with 2014-2015 full time equivalent enrollment of 181,379.

ACCUMULATED RESERVES ENABLED FLEXIBILITY

The district's financial performance over the last few years had benefited significantly from one-time revenues which built balances to a strong 12.3% of spending by fiscal 2011. The district executed planned draws on these higher reserves through fiscal 2014 to weather the economic downturn. Fitch expects the district to maintain structural balance over the longer term as further weakening of reserves, especially during a time of economic recovery, would strain credit health.

The fiscal 2014 budget was balanced with an $86.8 million (5.6% of spending) use of reserves. Through conservative budgeting and cost controls, the results for the year show actual reserve use of $21.4 million (a modest 1.4% of spending). General fund revenues were 1.2% over original budget, and expenditures were 2.2% under budget. The district's conservative budgeting for full staffing and turnover contributed to expenditure savings. Unrestricted general fund balance of $74 million was an adequate 4.9% of spending, including the 3% contingency reserve required by board policy.

Total general fund balance, including reserves restricted, was 7.4% of spending. While restricted reserves are locally tied to categorical spending, the funds contribute to liquidity. The district's cash flow borrowing was a moderate $115 million in each of the past four years.

POSITIVE PROJECTIONS FOR FISCAL 2015

The district is projecting to close the year ending June 30, 2015 with a $5.3 million general fund operating surplus (.5% of revenues and transfers) and an unrestricted balance of 5.2% of spending. As is typical for the district, operations are expected to exceed budget. The district budgets conservatively and favorable variance negated the $65 million of appropriation of reserves. The budgeted $11 million transfer from the health internal service fund (ISF) was not utilized, although the district may make the transfer in a future year. Staffing turnover and lower than expected charter enrollment contributed to favorable budget variance. Teacher contracts were settled late in the school year, retroactive to March 2015. Also, the district received over $4 million in an upfront payment from a broadband lease agreement.

Similar to the previous year, the fiscal 2016 budget is balanced with a $66 million appropriation of fund balance. Given the district's practice of conservative budgeting, the district is expected to outperform budget. Enrollment is projected to increase by approximately 3,000 students with the growth largely to be absorbed by charter schools. Nearly 12% of district enrollment is served by charters.

The state budget increased per pupil funding by 3%, and the district budget includes a $27 million appropriation dedicated to a 3% salary increase (the teachers' contract expired June 30, 2015). The district expects to remain in compliance with its general fund balance policy, which is maintain a contingency reserve equal to 3% of the appropriations and outgoing transfers. As economic recovery continues, Fitch considers 3% a modest reserve level and expects the district to rebuild fund balance.

VOTER SUPPORT FOR MILLAGE RENEWAL

Florida school district's school property tax rates are largely prescribed by the state. Exceptions include the additional voter operating millage for a period of up to four years subject to the overall statutory limit of 10 mills, which the district is well under. In November of 2014, voters approved, by a sizable 79%, renewal of the .25 mills designated for the fine arts and choice programs. The four-year millage will expire after the levy for fiscal 2019. In fiscal 2015 this levy generated an estimated $39.6 million.

The district's overall level of financial flexibility should benefit over time from increasing capacity under the capital outlay millage capped at 1.5 by state law. Estimated maximum annual lease payments of $144.8 million require 60.9% of the fiscal 2016 levy with the remainder of the levy funding maintenance needs. Limited construction and debt needs and prospects for tax base growth should result in continued declining utilization of capital millage for debt service, freeing up additional funds for maintenance related operations. The tax base has accelerated over the past three years with strong 10.3% growth in for fiscal 2016, partially reflecting the $1 billion addition of the new Florida Power and Light facility to the taxbase.

LOW DEBT AND LOW CARRYING COSTS

District debt ratios are expected to remain low given the absence of new issue borrowing plans. Overall debt is just 1.7% of market value and $2,387 per capita. The district's fiscal years 2016 to 2020 capital improvement plan includes projects totally $750 million (net of $767 million for debt service) with spending primarily for transfers to the general fund for maintenance improvements. All needs are funded with pay-as-you-go revenues, largely excess capital outlay millage. The CIP assumes the tax base will grow by approximately 5% a year.

The district is hiring a consultant to do a facilities study and the report will help the board determine whether to seek voter approval in November 2016 for capital-dedicated sales tax authority. A previous voter approved dedicated sales tax expired in 2010. Current estimates show the tax would generate approximately $115 million per year. The district maintains 182 schools: between fiscal 2001 and 2014, 41 new schools were built and 56 others were replaced or totally renovated.

Long-term liabilities related to pension and other post-employment benefits (OPEB) are manageable. The district participates in the Florida Retirement System, a statewide defined benefit pension plan. The funded ratio for the plan was 80.8% at July 1, 2014.

Fiscal 2014 total county carrying costs (debt service, pensions and OPEB) were a low 13.4% of total governmental expenditures. In 2014, payment of a $28.5 million swap termination fee contributed to an increase in debt service costs during this year only. The June 30, 2015 OPEB unfunded accrued liability of $135.6 million is a minimal .1% of the fiscal 2016 taxable value of real property. The OPEB liability represents the implicit subsidy of offering retirees the ability to purchase health insurance at the group rate.

The district has $346.9 million in variable-rate debt outstanding equaling 23% of total direct debt. The debt is structured as floating-rate notes absent a put feature, eliminating the need for liquidity support. Interest rate risk is hedged via three derivative contracts with a notional amount of $347 million and a negative mark-to-market of -$83.2 million as of June 30, 2015. The variable-rate exposure is mitigated by the district's active financial and debt management practices and swap terms that do not require collateral posting in any event.

ECONOMIC RECOVERY

The Palm Beach County economy continues to recover with robust job growth and improving conditions in residential construction. The June 2015 county unemployment rate of 5.2% is near the national rate of 5.3%. High per capita resident wealth levels help fuel recovery in service and retail sectors. The county's 2013 poverty rate of 14.5% modestly trails the state and national rate of 16.3% and 15.4%, respectively.

Global Insights (GI) projects strong gains in population and healthy consumer spending in South Florida, ahead of the national average for the next five years, with employment growth driven by professional and business services. The county's list of top employers is dominated by health care networks such as Tenet Healthcare, Hospital Corporation of America, Bethesda Memorial Hospital and Boca Raton Community Hospital. Research within the healthcare sector is a growing presence, anchored by the Scripps Research Institute (biomedical studies) and the Max Planck Florida Institute for Neuroscience. The county's educational attainment profile surpasses the state and nation, with a notable 12% of residents holding advanced degrees.

LIMITED APPROPRIATION RISK

Fitch believes the district has a strong incentive to appropriate for lease payments. An event of non-appropriation would terminate all current leases under the master lease and allow the trustee to repossess approximately 88 school buildings acquired pursuant to the master lease, representing approximately 38% of the educational facilities space available to the district. An event of non-appropriation could also impair the district's ability to issue additional COPs, the primary mechanism for funding long-term capital needs, with just under $1.5 billion in principal amount outstanding.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings, New York
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Director
Patricia McGuigan, +1-212-908-0675
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Senior Director
Michael Rinaldi, +1-212-908-0833
or
Committee Chairperson
Managing Director
Amy Laskey, +1-212-908-0568

Contacts

Fitch Ratings, New York
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Director
Patricia McGuigan, +1-212-908-0675
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Senior Director
Michael Rinaldi, +1-212-908-0833
or
Committee Chairperson
Managing Director
Amy Laskey, +1-212-908-0568